Brief Event-Driven: Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices and more

In this briefing:

1. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices
2. Versum Materials – Entegris Beaten to the Punch by Merck KGaA
3. The Mechanics of the Panalpina Vote
4. Descente Descended and Itochu Angle Is More Hostile

1. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices

• SamE Common/1P price ratio gap is again above +100% of σ on a 20D MA in favor of Common. Deepening concerns about memory chip price hammered both SamE and Hynix yesterday. But SamE 1P couldn’t capitalize. 1P fell even further, almost reaching 120D high in Common/1P price ratio in favor of Common.
• We’ve recently heard rebounding demand for memory chips. This has pushed up both SamE and Hynix lately. Improving fundamentals coupled with the March AGM cycle factor have consistently supported SamE Common/1P price ratio above +0.5σ on a 20D MA since late Jan. This optimism is now facing a serious challenge probably for the first time since late last year.
• Opinions are still heavily divided on memory chip business outlook. The concerns reignited by the falling price news would be here with us in the coming few weeks at least. This’d outweigh even the March AGM factor. 1P starts placing itself ahead of Common. I’d go long 1P and short Common now. I’d hold onto the position until -150~200% of σ. This is a 5~6% yield.

2. Versum Materials – Entegris Beaten to the Punch by Merck KGaA

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum Materials (VSM US) the morning of February 27, 2019, with the announcement of a $48 per share cash acquisition proposal that was presented to Versum’s board of directors that same day. Versum, which was spun out of Air Products & Chemicals, Inc (APD US) in 2016, is a global provider of solutions (Materials and Delivery Systems and Services) to the semiconductor and display industries.

On January 28, 2019, a day after the WSJ broke the story that Versum and Entegris were in talks, the companies announced a $9 billion (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the other 52.5%. The deal was well received with both companies’ shares climbing steadily since the announcement.

However, these best laid plans took a Teutonic turn when the other Merck (Merck KGaA, the German pharmaceuticals and chemicals group unaffiliated with Merck & Co Inc. (MRK US) of the USA) threw its hat in the ring.

According to Merck, its Executive Board unanimously approved its proposal and is fully committed to pursuing the transaction. Merck said it is prepared to proceed immediately to due diligence and negotiations and to quickly agree to a merger agreement. It further stated the completion of the offer will be subject to customary closing conditions, including the receipt of necessary regulatory clearances.

The $48 per share proposed price is a 51.7% premium over VSM’s January 25, 2019 share price just prior to the announcement of the Versum/Entegris merger and a 15.9% premium over VSM’s closing price on February 26, 2019.

The ball is now in the VSM board of directors’ court and below we’ll look at how the board might react and where the chips may fall.

3. The Mechanics of the Panalpina Vote

This insight is a kind of public service announcement for investors looking at the Panalpina Welttransport Holding (PWTN SW) situation as it might affect the likely upcoming Extraordinary General Meeting that the Ernst Göhner Foundation requested of Panalpina, and to which Panalpina has acquiesced. The agenda item of the EGM requested is to implement a “One Share One Vote” system. 

Activist Cevian has come out against the proposal by the Ernst Göhner Foundation. This sounds counterintuitive except for one odd legal angle.

The Foundation’s ostensible goal is to ensure that the vote is “fair” so that Cevian and Artisan Partners can vote their full stake after having been capped at 5% for many years because of Article 5 in the Panalpina Articles of Association. The more cunning aspect of this is that, as per the Panalpina announcement…

In a letter addressed to Panalpina’s Board of Directors, minority shareholder Cevian had recently questioned the practice to fully admit EGF with all its voting rights at the Company’s shareholders’ meetings. Cevian took the position that the voting restriction of 5% must be applied to all shareholders and, hence the voting power of EGF must be reduced to 5%. An ad hoc board of independent directors (BoiD) consisting of five directors (without representatives of EGF and Cevian) and chaired by Thomas E. Kern, is currently evaluating the situation based on expert opinions submitted by each of EGF and Cevian and based on independent expert advice obtained by the BoiD.

The Foundation knows that their position may be legally weak, and their position could be capped at 5% rather than grandfathered. Indeed, the “independent expert advice” obtained by Cevian includes the opinions of “four leading Swiss stockbrokers” who had come to the conclusion that the Foundation had been unlawfully excluded from the 5% cap, according to this Reuters article on the 26th. The company states that the Ernst Göhner Foundation is and has been exempted from this rule because of “grandfathering” because it owned the shares before the implementation of the rule, but there is nothing in the Articles of Association which grants the EGF that exemption. The full Cevian press releases in English and German are available through their spokesperson and are attached below (at the bottom of the insight).

Another Reuters article discussed the situation, with quotes from Cevian, and added this tidbit at the end.

An ad hoc board of independent directors consisting of five directors, without representatives of EGF and Cevian…will review the proposal and decide how the voting on it will take place at the extraordinary general meeting,” spokeswoman Edna Ayme-Yahil said.

Investors should note…..

The last paragraph of Article 5 of the Panalpina Articles of Association says “No entries shall be made in the register of shareholders following the dispatch of the convocation to the Shareholders’ Meeting until the day after the Shareholders’ Meeting.” This is a little different than is the case for many large Swiss companies where they give the convocation and investors may subsequently register their shares.

In Panalpina’s case, if you are not registered by the time the company sends out the convocation, there is no requirement for the company to admit your shares to the register even if there is plenty of time to do so (though the Board can make exceptions to the entry restriction).

For investors interested in or concerned about the situation, there are measures which may be advisable to implement ASAP to ensure you can vote.

4. Descente Descended and Itochu Angle Is More Hostile

Descente Ltd (8114 JP) has been in the press quite a bit in recent days with management commentary about how the company and directors disagree with the Tender Offer launched by Itochu Corp (8001 JP) to raise their stake from 30% to 40% and how it could lead to conflict of interest and worsening management, lower morale for employees, and a loss of independence.

Management, former management, and former employees have all joined the party. Wednesday saw a significant sell-down of shares to a post-Tender Offer low, but it was not clear why.

Descente had, on the 26th, noted in a puff piece in the Nikkei that it would move up the release of its next Mid-Term (Three Year) Plan (normally due in May this year), and it would focus on growing direct sales in China through more stores, growing sales in the US through adding products to the list (currently the major product in North America is skiwear), selling LeCoq Sportif in Indonesia and Munsingwear in Vietnam. WHEN is unknown, but the explicit goal is to encourage shareholders to keep their shares rather than tender them to Itochu.

Today saw a new filing from Itochu in which it amended its original announcement, claimed Descente’s activity in the media was additional and additive to the Target Company Position Statement filed on 7 February, and for that reason, their activity had not been appropriately disclosed to shareholders. Furthermore, Itochu noted that while the jibber-jabber had been going on the last two-plus weeks, Descente had asked Itochu to negotiate post-Tender management structure plans, and Itochu had agreed. Itochu and Descente talked for 9 days from 11-20 Feb but Descente was bad-mouthing Itochu in the press at the same time. That induced Itochu to stop talks. And late today, the Nikkei has released a 27 February interview with the CEO of ANTA, Itochu’s longtime textile partner in China and a 6.86% holder of Descente shares, where he says that he supports Itochu’s tender offer, will not sell their shares in Descente, and would support Itochu efforts to restructure management. 

These three new developments change things in interesting ways, in my opinion pushing Descente’s own plans closer to Itochu’s, and introducing the possibility of significantly more hostility to come, with a much higher likelihood Itochu can win the proxy wars to come. 

In-depth analysis below the fold.

Previous insights on the situation and its runup are listed below.